What will the rapid economic growth under open borders look like?

Open borders will lead to rapid economic growth in some countries, particularly the countries that receive migrants. This will be true even if the per capita income of natives doesn’t rise much (or even if it falls). The total size of the economy will grow. The situation with countries sending migrants is more complicated: the decline in population means that the size of the economy could shrink, even if per capita income rises. On the other hand, very high remittances or reverse migration and joint multinational businesses could offset the huge population loss. This blog post explores the sorts of things that could happen under open borders.

A few historical and current examples worth considering:

The United States in the second half of the 19th century: The example fits well in the following ways: immigrants were quite poor, the economy as a whole was backward but improving fast, and the immigrants were from many different cultures and spoke many different languages. The example fits badly in the following ways: the US was at the technological frontier, the place premium wasn’t huge (both sending and receiving countries were poor), and the whole event occurred in a time when many other aspects of global culture and technology were different. In particular, due to greater costs of transport and communication, and many other reasons, the total foreign-born proportion of the population was not too high: it peaked at 15% in 1910, compared to about 13% now under fairly closed borders in the US (more here).

China from after the death of Mao Zedong in 1976 (we expect to write more about China later; for now, check out our blog posts tagged China): The very rapid “catch-up” economic growth in China is comparable to the sort of growth we’d expect to see in migrant-receiving countries under open borders. The scale of rural-urban migration over the preceding and coming decades is in the hundreds of millions, comparable to the levels we’d expect with a decade or more of open borders. The proliferation of cities in China in recent years provides a model for what might happen under open borders. On the flip side, migration in China is happening across a far more homogenous linguistic and cultural milieu than what we’d expect under open borders. Moreover, China has a single government that can (and to some extent does) coercively restrict and coordinate migration in ways that wouldn’t work for global open borders unless there is world government or some supranational body that exerts heavy control over the coordination of international migration. China is also unrepresentative of global open borders because the place premium isn’t that huge.

India since its economic liberalization beginning in the late 1980s and with the main big step around 1991 (more on India here; see also all blog posts tagged India): India offers an example that’s both better and worse than China in terms of predicting what will happen under open borders. On the “better” side, there’s the fact that India is linguistically more diverse, so that many of the global challenges faced by migrants are experienced on a smaller scale in India. Although India is also religiously diverse, the religious diversity isn’t too strongly linked to location (the major religions are dispersed over many locations). India also offers a better model of a situation where the government does not plan either to stop migration or to prepare to accommodate it, unlike China, where both national and local governments have taken a more proactive approach to regulating flows. As of 2001, India measured 191 million internal long-distance migrants, about 20% of the population then. This number is comparable with the sort of migration magnitude we’d see under open borders, though it’s somewhat less than the amount of rural-urban migration in China. As with China, the place premium isn’t big enough to test some of the concerns associated with open borders. On the “worse” side, India is an even poorer country than China, so the parts of India that receive immigrants serve as bad models of how the destination countries under open borders would look.

The European Union today (see this related post by Hansjoerg and all our posts tagged the EU): This example is better suited in the respect that the target countries of migration are wealthy First World countries, which we expect will see a lot of immigration under open borders. But none of the source countries is too poor: the poorest countries in the EU are Romania and Bulgaria, which are middle-income countries (things will become more interesting once Albania joins). Quantitatively, migration between EU states on the whole is much lower than intranational migration in India and China, and much lower than what we’d predict under global open borders. About 3.2% of EU residents were born in another EU country, compared to 6.3% who were born outside the EU (see here and here).

The following table provides a comparative summary of the four cases considered above in terms of how good they are in their similarity to how we expect open borders to unfold (so “good” here means “good as a model for figuring out how things will be under open borders”, not “normatively good” or “desirable”):

Attribute

19th century US

China

India

EU

Scale of migration

Moderate

Good

Good

Bad

Absolute poverty in source countries

Good

Good

Good

Bad

Absolute wealth in target countries

Moderate

Moderate

Bad

Good

Place premium

Moderate

Moderate

Moderate

Moderate

Cultural heterogeneity

Moderate

Bad

Moderate

Moderate

A few other examples that aren’t quite as good because the scale involved is too small, but are still interesting in some respects:

Open borders between Puerto Rico and the United States (see this blog post by Bryan Caplan): The place premium was moderate, the cultures were different (English versus Spanish). The scale of migration, over the long term, was huge relative to the sending country, but small relative to the receiving country. This example isn’t so helpful for our purpose because the US is too huge relative to the Puerto Rico for the migration to have had huge effect; however, some parts of the US (such as New York and Florida) have been influenced by Puerto Rican migration.

Israel has had open borders of sorts for Jews from around the world. A large number of East European and Russian Jews have migrated to Israel. Joel Newman crunched the numbers in this blog post. Although this is open borders of sorts, the small absolute size of the experiment makes it uninteresting in terms of figuring out how migration works at scale and can lead to rapid economic growth.

South Africa’s end of internal apartheid (discussed by Grieve Chelwa here) is also interesting, but again the scale of migration is insufficient to provide a clear sense of how things will proceed under open borders. The South Africa example is more interesting in that it involves a significant policy change in the open borders direction, but the focus of this blog post is more on the economic growth facilitated by mass migration than on the suddenness of the change.

The mix of labor and capital

Economic growth has been classified as intensive growth and extensive growth. Intensive growth involves changes in the mix of inputs and/or changes in the production technologies, i.e., the introduction of new ideas or new methods to produce more from the same inputs. Extensive growth involves an increase in inputs.

Now, to some extent, the change under open borders is extensive: a lot more labor is being added to the world economy. But in another respect, the change is intensive: the ratio of labor to capital shifts drastically worlwide, and even more so in countries that are migrant destinations. For more on this point, see Nathan Smith’s blog post on John Kennan’s paper on open borders. I quote a part of Kennan’s original paper that Nathan quoted; Nathan’s elaboration is worth reading at the link:

These gains are associated with a relatively small reduction in the real wage in developed countries, and even this effect disappears as the capital-labor ratio adjusts over time; indeed if immigration restrictions are relaxed gradually, allowing time for investment in physical capital to keep pace, there is no implied reduction in real wages.

I see two sorts of trajectories that could unfold:

The planned trajectory is one where borders are opened gradually and labor regulations are modified to better use the new labor mix. In this case, people have more time to accumulate more capital stock. I would expect that in this case, industry will play a big role in migrant-receiving countries: entrepreneurs and industrialists will set up large factories in anticipation of the huge migrant workforce they can have access to. They will undertake huge construction projects or expand agribusinesses.

The unplanned trajectory, where migration barriers are removed quickly with little coordination and planning, would probably see more of a shift to the services sector, which is less capital-intensive and where new people can join quickly.

Indeed, of the examples of China and India, the more planned and controlled case (China) has had more reliance on industry whereas the more chaotic case (India) has had more reliance on services (see more here). Note that in the longer run, I’d expect everything to move in the direction of services, when industry becomes so efficient that adding more people isn’t worthwhile at all (even at zero wages). But we’re far from there yet.

What about growth due to technological progress at the frontier? It’s possible that the progress of the frontier will not be affected much by open borders, but I personally expect that frontier progress will happen somewhat faster under open borders than under the counterfactual. This is the basis of the innovation case and the one world vision of open borders. I do expect that sending countries are likely to experience intensive growth and technological progress due to the circulation of people and ideas, though whether their economies as a whole grow or shrink would depend on how the magnitude of this effect compares with the decline in population. For arguments that open borders impede the progress of the technological frontier, see our page on killing the goose that lays the golden eggs.

The creation of new cities

There’s evidence to suggest that migrants who travel long distances tend to move to cities, for a variety of reasons. While living in one’s own village or small town may be preferable for many, living in a small town that one does not have connections with is hard. Cities are more conducive to strangers from faraway lands. They offer a wider range of job opportunities as well as amenities. The existence of a larger population allows for restaurants and supermarket products offering ethnic cuisine that wouldn’t be economically feasible in a smaller town.

It’s likely that there will be a lot of migration to the existing top cities of the world, but these cities have sky-high rents and are unaffordable to many poor migrants who don’t have enough skills to find jobs that could pay those rents. What I expect to see is many new cities crop up. Most likely, these cities will grow from existing small towns, potentially disrupting the lifestyles of residents of those towns. Natives are likely to have a mixed reaction: those who wanted city life but didn’t have the money for the big cities can benefit from the greater urbanization of their small town, and those who didn’t like city life may experience a decline in their quality of life (some of them may migrate to other places in their own country to get away from the overcrowding). Recall also Nathan Smith’s land value windfall argument: the price of new housing of a given quality can remain the same or even decline, even as the price of existing housing can keep rising due to an increase in the demand for living in established cities and towns.

It’s also possible that entire new cities can be created from scratch. One can imagine, for instance, a few companies setting up large factories in an area, and a huge amount of cheap housing for the people working in those factories. Another possibility is that new cities will emerge in wasteland that is at the periphery of existing cities, or from suburban or exurban regions of existing cities.

The rate of migration itself has been accelerating and may be plateauing now, though it will eventually start decreasing once rural areas have depopulated. While part of the mechanism here is diaspora dynamics, the more likely explanation is simply the increasing rate at which the economy is restructuring to increase demand for labor in urban areas and decrease it in rural areas.

The creation of new cities is concentrated in the middle phase (city creation was most intense around 1990-2005) rather than very early (when migration is still just beginning, existing cities have enough room for the initial migrants, and it’s not clear where more people will want to settle) or very late (when the patterns of migration are already set).

New cities are generally created close to existing cities.

Increase in international trade and foreign direct investment

Immigration and trade can be both complements and substitutes, but I expect that, unless tariffs are raised havily, more migration will facilitate more trade. Multinational small businesses run by family members around the world will become more common. Larger businesses will find it easier to set up shop in a greater range of countries. Diaspora will be eager to invest or get their associates in their new countries to invest in ventures in their source countries, so there will be more foreign direct investment. As people become better connected, there will be a reduction in the anti-foreign bias that motivates restrictions on trade and FDI. Another relevant point is that the move towards open borders is likely to be accompanied by a move towards free trade and FDI, because both proceed through the gradual expansion of free trade and free migration zones (such as the European Union).

A somewhat different vision

Some of the major problems of developed countries today would be solved by open borders. Government debt becomes less burdensome when population and total GDP rise, even if per capita GDP falls. As mentioned above, long-term demographic problems of shrinking and greying populations would be mitigated or eliminated by open borders (this does depend on the composition of immigrants, but given the relative youthfulness of the world population as a whole and the greater propensity of the young to move, the prediction that open borders would help can be made fairly confidently). Almost all homeowners and owners of real estate would enjoy a windfall benefit from rising population as demand and prices rise. This effect would not be offset by losses to renters, or to people unwilling to sell, from higher rents and property taxes. As cities expanded, renters could still live in comparably dense, interesting places, and homeowners who stayed put would get the windfall not in cash but in being through the midst of more economic activity (i.e., more shops, restaurants, entertainment, interesting streets, jobs and business opportunities, etc.– all the amenities of urban living for which people pay high urban rents).

Savers and owners of capital would tend to benefit as well, from an abundance of investment opportunities, but there would be downward pressure on wages. Crudely speaking, “unskilled” workers would see their wages fall, while some “skilled” workers would probably see their wages rise. But then, some of the basic skills Americans take for granted, like speaking native English, cultural fluency, and driving cars, would become “skills” for which premia could be earned. Immigrants would help poorer natives as customers, by creating a mass market for low-price goods, and giving companies a stronger incentive to pursue “frugal innovation.” There might be more business opportunities for entrepreneurially inclined natives even without a lot of education. Overall, it is extremely likely that natives as a whole would benefit, but without deliberate efforts to prevent it via fiscal policy, a substantial minority of natives would be likely to see their living standards fall due to open borders.

I would both advocate and anticipate that policy would do much to protect the least fortunate natives against a fall in living standards due to open borders. Moreover, this would be fiscally feasible, because open borders would greatly expand the tax base. Some natives might find jobs scarce and/or wages very low, yet receive transfer payments from the government which would enable them to live a “middle class,” house-and-car-in-the-suburbs, lifestyle. Others would see their wages fall but find themselves more than compensated by a rise in the price of their home and the value of their stockmarket portfolio– while also, perhaps, enjoying new transfers and/or tax cuts from a government flush with revenues from immigrant taxes. The hardest part of adjustment would be the moral impact of labor falling in value. One tenet of what I call “the macroeconomic social contract”– that anyone who is willing to work should be able to find a job that enables them to earn a decent living standard– would be further undermined.

Also discombobulating for natives would be the emergence of vibrant shantytowns and ethnic districts on an enormous scale. Pre-assimilation would mitigate the problem of absorbing immigrants into mainstream society, though on the other hand the number of immigrants would be larger than in the 19th century both in absolute numbers and as a share of the population. But Americans would hear more languages spoken on the streets, see more holidays celebrated, see a wider variety of religious buildings and of clothing. There would be neighborhoods where native-born US citizens would have the experience, charming to some but frightening to others, of being on American soil yet feeling like they were abroad. European countries, I expect, would face a different problem, namely, that some immigrants would prefer to assimilate to an “Anglobalized” international bourgeoisie, rather than to Dutchness or Norwegianness or Italianness. They would have to cope with large populations of foreigners who seemed content to reside permanently in their countries, getting by with English. Sweden or the Netherlands might see their living standards rise under open borders, even as Swedish and Dutch faced displacement by English as the nation’s first language. (That might happen anyway, but open borders would accelerate it.)

While the native-born citizens of the rich world need not see their living standards fall and most to all would probably see them rise, likely by a lot, under open borders, there would be far more poor people in the rich world. Germans and Danes and Italians and Washingtonians and Californians would have to get used to seeing a lot more deep poverty on the streets, and content themselves with knowing that there was much less poverty in the world because there was a little more at home. The moral underpinnings of the national socialist models of society that prevailed in the 20th century would have to be abandoned. Territorialism as a meta-ethical prejudice would have to be refuted at the level of reason and then wrung out of people’s intuitions.